Southern California's hottest commercial real estate market is for tenants that aren't human
Where Wilshire Boulevard begins in downtown Los Angeles, an ordiNARy-looking office tower known as One Wilshire serves as a critical hub for undersea fiber-optic cables connecting Asia and North America. This building, once home to lawyers and other professionals, has been transformed into a major data center, filled with cables, pipes, coolers, generators, and other essential equipment to support the ever-growing demand for data storage and computing power.
Maile Kaiser, Chief Revenue Officer of CoreSite, the largest tenant in One Wilshire, emphasizes that everyone is a consumer of data centers, whether through social media, streaming services, or online shopping. The digital transformation of One Wilshire is part of a broader real estate boom in Los Angeles County, driven by the increasing need for data storage due to artificial intelligence and cloud services. Real estate developers are racing to build new data centers or convert existing buildings to meet this demand, which is so high that they struggle to keep up.
According to a report by real estate brokerage JLL, the construction of new data centers is at extraordiNARy levels due to insatiable demand. Darren Eades, a JLL real estate broker specializing in data centers, notes that he has never seen such global demand in his 25-year career. Major tech companies like Amazon, Microsoft, Google, and Oracle are the primary drivers of this demand. With conventional office buildings still struggling post-COVID-19, data centers present a lucrative opportunity for real estate developers.
Data centers require significant power to operate, and developers are seeking locations with abundant and affordable electricity. The U.S. colocation market, where businesses rent space in data centers owned by other companies, is expected to triple in size once current projects are completed. The release of OpenAI's ChatGPT in November 2022 has significantly impacted data storage needs, with generative AI requiring substantial computing power.
Real estate investors are drawn to the data center market due to high tenant demand and the likelihood of lease renewals. Rents at One Wilshire, for example, can be double those of newer downtown office buildings. The building is now almost entirely occupied by servers, power lines, and cooling equipment, with recent vacancies quickly filled by data tenants.
However, the rapidly expanding data center industry faces challenges, including finding trained workers to staff facilities around the clock. High-paying jobs in this sector are in demand, but the work can be taxing, leading to high turnover rates. Southern California, in particular, suffers from a shortage of new data centers, prompting development in smaller markets like Vernon and Monterey Park.
Power demand for computing is growing so intense that it threatens to strain the nation's electrical grid, pushing developers to remote locations with plentiful and cheap power. For instance, CalEthos plans to build a data center near the Salton Sea in California's Imperial County, powered by geothermal and solar plants. By 2030, data centers could account for up to 11% of U.S. power demand, up from 3% currently.
In a notable development, Microsoft has agreed to buy power from the shuttered Three Mile Island nuclear power plant in Pennsylvania for 20 years, pending regulatory approval. This plant, the site of the nation's worst commercial nuclear accident in 1979, was closed five years ago due to financial losses. The deal underscores the critical need for power to support data centers.
As Maile Kaiser points out, the demand for data centers will continue to grow as people increasingly create and consume digital content. The future will see further integration of AI, driving even greater demand for data storage and computing power.
